2015 (7) TMI 876 - HC - Income Tax

Assessee prevails in tax case with Tribunal upholding key legal points

The Tribunal's decisions on various substantial questions of law were all answered in favor of the assessee. The Court upheld the allowance of provision ... Provision made towards anticipated warranty claims - whether an allowable deduction - whether Tribunal was correct in holding that a provision for warranty claim made by the assessee for any claims made by the assessee's customers in future in respect of defect on repairs towards goods sold should be allowed as an expenditure during the current assessment year itself? - Held that:- It is discernable that the assessee takes into consideration the past historical cost, cost escalation, length of warranty with regard to the equipment and spares, increase in volumes over such period etc. It is also clear that the actual expenses incurred on warranty are debited to provisional account and not to the Profit and Loss Account. On consideration of the entire facts and circumstances the provisions made reflect accrual of liability that the impugned provisions is computed on scientific and reasonable basis and hence they declined to interfere with the conclusions drawn by the first Appellate Authority which had granted the relief. This is the basis on which the assessee was expected to put forth his claim for warranty by virtue of the impugned orders where an order of remand was passed. The said order is in conformity with the law declared by the Apex Court in the case of Rotork Controls India (P) Ltd. v. CIT [2009 (5) TMI 16 - SUPREME COURT OF INDIA ] and therefore once a claim of warranty is made after undertaking the aforesaid exercise before putting forth a claim, we are satisfied from the material on record that the claim made by the assessee is in accordance with law and in accordance with the judgment of the Supreme Court and therefore no case for interference with the said order is made out much less for remanding the case to the Assessing Authority - Decided in favour of assessee. Entitlment to deduction under Section 80HHC - without including the sales tax and excise duty collected during the assessment year by the assessee when computing the total turnover before computing the deduction? - Held that:- The Apex Court in the case of CIT v. Lakshmi Machine Works [2007 (4) TMI 202 - SUPREME Court] held that the excise duty and sales tax cannot form part of turnover in the formula contained in Section 80HHC of the Act and therefore the order passed by the Tribunal is in accordance with law and no case for interference is made out. Accordingly this question of law is answered in favour of the assessee Whether Tribunal was correct in holding that the assessee which manufactures motor spares, has also interest income which cannot be excluded to an extent of 90% while computing the profits of the business as per explanation (baa) to Section 80HHC of the Act and Section 80HHE of the Act? - Held that:- As decided in case of ACG Associated Capsules (P.) Ltd., v. CIT [2012 (2) TMI 101 - SUPREME COURT OF INDIA] ninety per cent of neither the gross rent nor gross interest but only the net interest or net rent, which had been included in the profits of business of the assessee as computed under the head 'profits and gains of business or profession', was to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining the profits of the business - Decided in favour of assessee. Whether the Tribunal was correct in holding that 90% of fee refund from Robert Bosch cannot be treated as business income of the assessee but should be treated as other income and consequently deduction as per section 80HHC was not allowable? - Held that:- As decided in CIT v. Motor Industries Co. Ltd. [2010 (8) TMI 333 - Karnataka High Court] The disputed income was earned by the assessee for its fees towards developmental work from the foreign enterprise. The developmental work was intimately connected with the business of manufacture and sale of goods by the assessee. There was immediate nexus between the activity of export and the developmental work. The consideration received for developmental work was not liable to be deducted under clause (baa) in computing the profits of the business - Decided in favour of the assessee. Whether the Tribunal was correct in holding that the assessing officer cannot exclude expenditure incurred in foreign exchange for providing technical services in working out the export turnover as well as total turnover for the purpose of deduction under section 80HHE of the Act? - Held that:- The assessee is engaged in the business of export out of India of computer software and its transmission to places from India outside India. Before a computer software is exported, the Software Engineers of the assessee would have initial discussion with regard to the requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted from India to a place outside India. The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of sub-section (1) of section 80HHE of the Act of providing technical services outside India in connection with the development or production of computer software. It falls under sub-clause (i) of sub-section (1) of Section 80HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export turn over. In that view of the matter we do not see any merit in this appeal. Accordingly, the said question of law is answered in favour of the assessee Whether the Tribunal was correct in holding that Scrap Sales Turnover cannot be included in the total turnover for the purpose of computation of deduction under Section 80HHC and 80HHE of the Act? - Held that:- In the instant case the assessee is in the business of export of computer software. For the purpose of Section 80HHC of the Act the income generated from the sale of scrap cannot be included in the total turnover and that is precisely what the Tribunal had held. We do not see any error in the said finding. In view of the law declared by the Apex Court in the case of CIT v. Punjab Stainless Steel Industries [2014 (5) TMI 238 - SUPREME COURT ] the said question of law is answered in favour of the assessee. Issues Involved:1. Allowability of provision for warranty claims as a deduction.2. Inclusion of sales tax and excise duty in total turnover for Section 80HHC deduction.3. Exclusion of interest income in computing profits under Section 80HHC.4. Treatment of fee refund from Robert Bosch under Section 80HHC.5. Exclusion of foreign exchange expenditure in export turnover under Section 80HHE.6. Inclusion of scrap sales turnover in total turnover for Section 80HHC and 80HHE.Analysis of the Judgment:On Substantial Questions Nos. 1 and 2:The Tribunal held that the provision for warranty claims is an allowable expenditure as it represents an ascertainable liability. The Tribunal directed the Assessing Officer to verify the basis for the provision, ensuring it aligns with the methodology used in the assessment year 1989-90. The Apex Court in Rotork Controls India (P) Ltd. v. CIT [2009] 314 ITR 62 emphasized that warranty claims must be based on a scientific basis, considering past experience and historical trends. The Tribunal's decision to allow the warranty provision was found to be in conformity with this principle, and thus, the substantial questions of law were answered in favor of the assessee.On Substantial Question No. 3:The Tribunal's decision that sales tax and excise duty should not be included in the total turnover for computing deductions under Section 80HHC was upheld. This was in line with the Apex Court's ruling in CIT v. Lakshmi Machine Works [2007] 290 ITR 667, which stated that excise duty and sales tax do not form part of turnover in the Section 80HHC formula. The question was answered in favor of the assessee.On Substantial Question No. 4:The Tribunal's decision regarding the exclusion of 90% of interest income while computing profits under Section 80HHC was supported by the Apex Court's judgment in ACG Associated Capsules (P.) Ltd., v. CIT [2012] 343 ITR 89 (SC). The Court held that only the net interest or net rent included in the profits of the business should be deducted under Explanation (baa) to Section 80HHC. Consequently, the substantial question of law was answered in favor of the assessee.On Substantial Question No. 5:The Tribunal's decision that the fee refund from Robert Bosch should not be treated as business income but as other income was supported by a previous ruling in the assessee's case (CIT v. Motor Industries Co. Ltd., [2011] 331 ITR 79). The Court found that the developmental work was intimately connected with the business of manufacture and sale of goods, and thus, the income from this work was not deductible under clause (baa) in computing the profits of the business. The question was answered in favor of the assessee.On Substantial Question No. 6:The Tribunal held that expenses incurred in foreign exchange for providing technical services should not be excluded from export turnover for Section 80HHE deductions. The Tribunal reasoned that the assessee was engaged in the export of computer software, and the technical services provided were part of this export activity. The Court agreed that such expenses should not be excluded from the export turnover, as they were integral to the software export process. The question was answered in favor of the assessee.On Substantial Question No. 7:The Tribunal's decision that scrap sales turnover should not be included in the total turnover for Section 80HHC and 80HHE deductions was upheld. The Apex Court in CIT v. Punjab Stainless Steel Industries [2014] 364 ITR 144 clarified that scrap sales do not form part of the total turnover for these purposes. The question was answered in favor of the assessee.Conclusion:All substantial questions of law were answered in favor of the assessee and against the revenue. The Tribunal's decisions were found to be in accordance with the legal principles established by the Apex Court.